If you picked up a cheap 325e, it would be silly not to do the head swap though.
Personally, I feel that a mildy tuned 323i would have more than enough power. The M20B23 puts out about 80rwkw, some BTB copies from Hot Tuning and 325i throttle body, intake and AFM should have that up to around 85-90rwkw. Which is plenty in a car that weighs 1050-1150kg.